CLUSTERS

Clusters are geographic concentrations of interconnected companies or
institutions that manufacture products or deliver services to a particular
field or industry. Clusters typically include companies in the same
industry or technology area that share infrastructure, suppliers, and
distribution networks. Supporting firms that provide components, support
services, and raw materials come together with like minded firms in
related industries to develop joint solutions and combine resources to
take advantage of market opportunities. These are groups of related
businesses and organizations—sometimes direct competitors, but more
often operating in a complementary manner. They may comprise more than
just one industry classification, and a true cluster is more than just a
supplierproducer-buyer model.

An economic cluster, or several clusters, serves as the driving force in
most regional economies. Examples include Detroit's auto industry
concentration, computer chip production in California's Silicon
Valley, London's financial sector, the Napa Valley's wine
production, and Hollywood's movie production industry.

The clustering concept was popularized by Harvard Business School
professor Michael Porter (1990). His techniques teach communities to
analyze their existing business and industrial bases and build their
economic development on those strengths. From the identified clusters in
an area, the next step is to develop a marketing plan for industry.

By developing a massive database of companies, county by county, Dr.
Porter's research has statistically grouped businesses together in
clusters. A strong cluster will include the suppliers of raw materials and
the distributors, as well as the primary producers. But it will also
include specialized services in finance, marketing, packaging, education,
and more, including specialized trade associations. In general, the
broader the base of related businesses, the better for the cluster, for
that often reflects the specialization that comes with concentrated
resources.

Related firms and industries have tended to locate in close geographical
proximity for a number of reasons. In his 1916 economic text, Alfred
Marshall was one of the first to see the benefits of spatial clustering:
the existence of a pooled market for specialized workers; the provision of
specialized inputs from suppliers and service providers; and the rapid
flow of business-related knowledge among firms, which results in
technological spillovers. It may be difficult to predict where clusters
will emerge beforehand, but their growth is easier to predict due to the
benefits gained from the strategy. A variety of terms are synonymous to a
cluster; these include co-location, industrial districts, and innovative
milieus.

BENEFITS OF CLUSTERING

A well developed concentration of related business spurs three important
activities: increased productivity (through specialized inputs, access to
information, synergies, and access to public goods), more rapid innovation
(through cooperative research and competitive striving), and new business
formation (filling in niches and expanding the boundaries of the cluster
map).

Clusters are always changing. They respond to the constant shifting of the
marketplace. They usually begin through entrepreneurship. Silicon Valley
is a relatively new cluster of computer-related industries; in the past,
Detroit was the same for automobiles. Nothing sparks productive innovation
better than having your competitor across the street.

Clustering helps cities and counties direct their economic development and
recruiting efforts. It also encourages communities to refocus efforts on
existing industries. Communities understand that the best way
to expand their own economies and those of the surrounding region is to
support a cluster of firms rather than to try to attract companies one at
a time to an area. Chambers of Commerce, business incubators, and some
universities work with companies to develop clusters and synergies in
business communities.

Strong domestic clusters also help attract foreign investment. If clusters
are leading centers for their industries, they will attract all the key
players from both home and abroad. In fact, foreign-owned companies can
enhance the leadership of the cluster and contribute to its upgrading,
according to research by Julian Brikinshaw (2000).

For small and developing businesses, locating in a cluster near
competitors and related industries may aid the firm in faster growth,
recognition, and status within the market. Economies of scale can be
gained by group purchasing within the cluster. There can be discussions
among cluster members about their unique competitive advantages and future
challenges. Linked supply chain networks can naturally be created within a
tightly-linked cluster. Informal day-today contact with similar companies
is also important, according to Natasha Muktarsingh. Of course, physical
location proximity is not always required to be a cluster. Many firms,
including retailers and publishers, can be grouped together on an Internet
site.

A CLUSTER EXAMPLE: "THE CARPET CAPITAL OF THE WORLD"

The city of Dalton, Georgia—located between Atlanta, Georgia, and
Chattanooga, Tennessee—is unrivaled in its production of carpet.
Almost 90 percent of the functional carpet produced worldwide is made
within a 25-mile radius of Dalton. In their 1999 book about the industry,
Randall L. Patton and David B. Parker note that Dalton has evolved in much
the same way as California's Silicon Valley, through a rapid
expansion of new firms started by entrepreneurs and through cooperation
among owners, mills, and local government. It was only after World War II
that the carpet industry came to be identified with this region.
Entrepreneurs developed a new tufting technology and captured the carpet
industry previously dominated by woven-wool carpet manufacturers in the
Northeast.

The six largest carpet companies and 18 of the largest 35 carpet companies
are headquartered in Georgia. The carpet cluster includes the carpet
tufting mills, yarn mills, finishers, backing manufacturers, machinery
suppliers, maintenance services, and sample companies that directly
support the carpet industry. Seventy-five to eighty percent of the yarn
used by the carpet industry is produced and processed in Georgia. Over
50,000 employees in Dalton are engaged in carpet manufacturing, and
seventy-two interstate trucking companies are utilized to transport carpet
and raw materials, in addition to fleets owned by many carpet companies.

A CLUSTERING MODEL IN PROGRESS

Porter recently applied his work in industry clusters and economic
analysis to the community that includes the carpet cluster. His data is
available at the county level and organizes businesses into some 50
industry clusters producing non-local goods and services. Many familiar
businesses are excluded. Fastfood restaurants, automobile dealers, and
newspapers, for instance, are spread rather evenly across the country, for
they serve basically local customers.

Porter also helped the city of Chattanooga, Tennessee, to perform a
cluster analysis. To implement a regional growth initiative, the city
appointed two groups: a steering committee of 25 members, including
prominent business and government leaders, to provide guidance and policy
direction; and a core team of business and academic leaders to research
local conditions and manage cluster team meetings. The region for study
was based on geographic features, political boundaries, local sentiments,
economic strengths, and even commuting patterns. For each cluster, a
"location quotient" was developed and defined as the
cluster's strength here compared to what might be expected if that
industry were spread evenly across the country.

The "Textiles and Floor Coverings Cluster," centered in
Dalton but with related businesses elsewhere in the region, was by far the
strongest cluster. The carpeting businesses also accounted for most of the
strength in the second strongest cluster, "Construction
Materials." Three additional clusters emerged:
"Confectionery and Baked Goods," "Tourism and
Hospitality," and "Medical Devices and Health
Services."

Leaders in each field, and others from lists generated by Standard
Industry Classification code numbers, were invited to become part of the
cluster team and attend a series of meetings over four weeks. The agenda
for the teams included a discussion of conditions in the cluster; issues
holding the cluster back; opportunities for creating better inputs,
sharper demand, and high-quality related institutions; and problems with
regulation, the labor pool, and the physical infrastructure. The meetings
also included a discussion of what cluster team members could do about
these issues; what types of legislation or change in processes could make
the cluster better; cooperative efforts toward applied research; and ways
to attract complementary businesses to the region.

The immediate goal was a plan for action that went well beyond analysis.
The ultimate goal was to
accomplish change. The core or "diamond" of the cluster
included: factor input conditions (labor, capital, resources, etc.);
demand conditions (nature of the home market, including any special
conditions or expertise locally); related and supporting industries (from
service industries to trade associations); and context for firm strategy
and rivalry (the level of entrepreneurship, and tradition of united
actions). The team in Chattanooga learned that concentrated competition
leads to greater prosperity, and the best strategy means not trying to do
all things but focusing on your cluster. There was also a more general
appreciation that the cluster process could, indeed, lead to more and
better-paying jobs and that a strong cluster would enhance the general
economic situation for its members. In the end, the Chattanooga region
should see a shift in its own business culture. It should move away form
traditional reliance on fixed endowments, and move toward real
competition, true productivity, effective collaboration and greater
prosperity.